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Fed Note - 6-12-2024

6/12/2024 brad

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The Federal Reserve Open Market Committee (FOMC) kept the federal funds rate unchanged at 5.25-5.50% in their June meeting, continuing the range set since July 2023 without any dissenting votes. The formal statement was only slightly adjusted to reflect "modest" progress towards their inflation goal. The June Summary of Economic Projections (SEP) updated the Fed funds rate estimates for the end of 2024, 2025, and 2026 to 5.1%, 4.1%, and 3.1%, respectively. This marks an increase of 0.5% for 2024 and 0.2% for 2025 from the March estimates. The FOMC's "dot plot" now suggests 1-2 rate cuts this year, down from the three expected in March.

Market expectations, as seen in the CME Fed funds futures, had nearly guaranteed no change in rates for the June meeting, with odds for July ranging between 80-90% for no change. September odds for a quarter-percent cut have risen to over 60%, while December expectations hover around two cuts. Projections for September 2025 indicate rates might fall to approximately 4.00%, implying 5-6 cuts from current levels.

Economic growth in Q1 was revised down to 1.3%, despite strong personal consumption. The Atlanta Fed's GDPNow estimate for Q2-2024 fluctuated between 1.8% and 4%, settling at 3.1%, surpassing the Blue Chip consensus of around 2.0%. The Fed's June SEP predicts GDP growth of 2.1% for 2024, 2.0% for 2025 and 2026, and 1.8% for the long term, unchanged from March.

Inflation data for May showed a 12-month rate of 3.3% for headline CPI and 3.4% for core CPI, both lower than expected. Core PCE inflation was at 2.75% through April. The June SEP revised core PCE inflation projections to 2.8% for 2024 (up 0.2% from March), 2.3% for 2025 (up 0.1%), and 2.0% for 2026 (unchanged). Inflation is improving slowly, which supports the Fed's cautious approach to easing. Factors affecting future inflation include global fiscal stimulus, geopolitical shifts, labor market conditions, and productivity gains from AI.

The labor market remains strong, with robust nonfarm payrolls, wage growth, and low jobless claims. The unemployment rate in May increased to 4.0%, partly due to higher labor force participation influenced by immigration. The June SEP shows unemployment rate expectations of 4.0% for 2024 (unchanged from March), 4.2% for 2025 (up 0.1%), and 4.1% for 2026 (up 0.1%).

Global monetary policies have diverged, with the European Central Bank and central banks in Canada, Sweden, and Switzerland beginning rate cuts due to weaker economic growth compared to the U.S. Despite cooling economic growth in the U.S., recession does not seem imminent. Inflation remains the primary concern, with elevated core services and wage growth.

Expectations for multiple rate cuts in 2024 have diminished, but there is potential for the Fed to start easing by year-end. Financial conditions are mixed, with tighter policy rates and a strong dollar balanced by higher stock prices and tighter credit spreads. Historically, stable or lowering interest rates have benefited stocks, bonds, and real estate, provided recession does not intervene. Current conditions suggest a cautious optimism, with no significant financial excesses or leverage that typically precede deeper downturns.

Sources: CME Group, Federal Reserve Bank, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics.